Central banks face jumpy bond market with 10 days of policy decisions

 While policy makers welcome a modest rise in bond yields as a signal of confidence in the economic outlook, they worry an unchecked jump would undercut recoveries

Central banks helped save the world economy from depression as the pandemic struck. Now they are dealing with the hard part: managing the recovery amid a difference of opinion with investors.

Optimism that Covid-19 vaccines and continued government stimulus offer an escape from the worst health crisis in a century has sent bond yields soaring and pushed bets on rising inflation in the U.S. to the highest in a decade.

That’s shifting the ground underneath monetary policy makers who promise to maintain rock bottom borrowing costs and cheap money well into the expansion. In the next two weeks, the Federal Reserve and European Central Bank as well as their counterparts in Japan, U.K, and Canada are all likely to reiterate those pledges, eager to secure a rebound in hiring and avoid the mistakes of the last crisis when some withdrew support too early.
The risk now seems skewed the other way. While policy makers welcome a modest rise in bond yields as a signal of confidence in the economic outlook, they worry an unchecked jump would undercut recoveries. They argue any resurgence in inflation will be based on a temporary correction from last year’s slide and that high unemployment will continue to restrain price pressures.

It’s a stark turnaround from a year ago, when the world powered down to fight the Covid-19 pandemic and central banks responded with what’s amounted to an unprecedented $9 trillion of monetary support.

“Central banks are facing a new challenge,” said Rob Carnell, chief economist for Asia Pacific at ING Bank NV. “How do they keep justifying easy policy as the recovery continues and the inflation figures pick up?”